Question 2 (23 marks)

Andrew is 35 years old. He is planning for his retirement. He plans to retire when he is 60 years

old.

Andrew contributes to mandatory provident fund (MPF). He contributes $1,500 and his

employer contributes $1,500 per month into his MPF account. The current balance in his MPF

account is $350,000. Andrew hopes that he will have $2,100,000 in his MPF account when he

retires.

The estimated annual retirement spending is $240,000 in todays value. He would like to have

sufficient money to support his retirement life until he is 80 years old.

Inflation rate 3% per year

Expected investment rate of return before retirement 5.4% p.a.

Expected investment rate of return after retirement 5% p.a.

Andrews Life expectancy 80 years old

A. Calculate the per month rate of return Andrew needs for his MPF investment to achieve the

amount in his MPF account when he retires. (4 marks)

B. Assume Andrew will achieve the target amount of $2,100,000 in his MPF account when he

retires. Calculate the extra amount Andrew needs when he retires in order to achieve his

retirement goals. (6 marks)

C. Further to part B, calculate the amount of extra annual savings Andrew has to make at the

end of each year before he retires. (5 marks)

D. Suppose Andrew has a total of $6,000,000 when he retires. Calculate the rate of return

(nominal rate) required per year for Andrew to support his retirement life until he is 80 years

old. (8 marks)